Why April’s unemployment report is worse than it looks

Yesterday’s announcement[1] that North Carolina’s unemployment rate had dropped to 8.9 percent last month was met with considerable acclamation in a number of media[2]reports[3] today. Unfortunately, much of this positive commentary was misplaced—despite demonstrating some superficial improvement, the new jobs report is far worse than it first looks.

In fact, the dip in the state’s unemployment rate is due almost entirely to a contracting workforce, rather than genuine new job creation. Specifically, almost 20,000 workers dropped out of the labor force the pool of prime age workers who either have a job or want one—last month, including 15,000 jobless workers who were unable to find employment and gave up searching.

Given that the labor force contracted by 20,000 and the total number of employed workers also dropped by 4,000 at the same time, it appears that the 14,000 drop in the number of unemployed workers is largely the result of jobless workers becoming discouraged—giving up on looking for work and dropping out of the labor force altogether.

As a result of these changes, the labor force—is now at the lowest level since July 2012, erasing almost 9 months worth of gains. Even more troubling, the total number of employed people in North Carolina also dropped to the lowest levels since October 2012, suggesting that North Carolina’s economy is continuing to struggle in generating long-term sustainable job creation.

In other words, unemployed workers moved out of the labor force altogether, rather than moving into new jobs.

As a result, the unemployment rate dropped due to a mathematical quirk in how the Bureau of Labor Statistics calculates the rate. The jobless rate is determined by dividing the number of unemployed workers who are looking for work by the number of workers in the labor force, so when the labor force contracted, the unemployment rate naturally went down as well, even though the labor market did not generate any employment growth last month.